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Four Observations on Local Government Finances in BC

This week’s Union of BC Municipalities (UBCM) convention showcased a major new report on local government finances authored by a UBCM committee. Entitled “Strong Futures: A Blueprint for Strengthening BC Local Governments’ Finance System,” the report argues that the current municipal financing model, which depends in large part on property taxes to fund local services, needs to be overhauled. In particular, the paper advances a case that municipalities in BC should have access to more revenue sources – including revenue streams that are closely linked to economic growth, such as sales tax and even income tax. Local governments in BC, the paper notes, are “heavily reliant on the property tax, which neither grows with the economy nor distributes costs fairly” (p. 6).

The UBCM Committee that developed the paper also concluded that the existing revenue streams used by local governments aren’t sufficient to pay for future upgrades and expansions of municipal infrastructure in areas like water treatment plants, sewer systems, parks and community centres, etc.

How should the business community respond to the UBCM’s paper, which was adopted at the 2013 convention?

Here are a few initial thoughts.

Yes, over time it probably makes sense to reconsider the revenue base and fiscal tools available to municipalities. While property tax is the main revenue source for local governments across North America, in the Canadian context an argument can be made that it plays too dominant a role in local government finances.

Finding ways to enable local governments to garner more of the benefits of economic growth is an idea worth pursuing. The UBCM paper assumes that municipalities gain little or nothing when such growth occurs. That’s clearly an exaggeration. If the private sector develops new commercial office towers, retail space, or business parks in a given community, presumably that community will enjoy a fiscal boost in the form of additional property tax revenues (and perhaps other fees and levies imposed on new business activity). Still, it’s true that the main fiscal upside from economic growth accrues to the provincial and federal governments, not municipalities. The business community would certainly welcome an increased focus by BC municipalities on how to facilitate economic growth.

The UBCM overlooks the financial challenges facing the provincial government. The paper implicitly assumes that Victoria has large amounts of unused “tax room” – e.g., sales or income tax – that could easily be transferred to municipalities. In reality, the long-term outlook for the BC government’s finances is not so positive. The taxpayer-supported provincial debt has been rising as a share of GDP, the forces pushing up the BC government’s health budget are both significant and unending, and the province is also under pressure to spend more on infrastructure, early childhood development, and education and skills. Moreover, the tax burden in BC, at least on the business sector, has increased with the return of the Provincial Sales Tax, the carbon tax, and the recent increase in the provincial corporate income tax rate. From the Business Council’s perspective, the BC government doesn’t have any spare cash or unclaimed tax room. Perhaps if major new revenue sources come into play from the emergence of a globally competitive liquefied natural gas industry, the fiscal picture will improve and municipalities can look to receive some of the resulting benefits. But that’s not the situation the province is in today.

Finally, it’s important not to overlook the spending side of the municipal government finance equation. The UBCM paper downplays this topic, but it clearly warrants more attention. Local government spending has been on something of a tear in many municipalities. Last year, the Business Council published a paper showing that operating spending by municipalities in Greater Vancouver, adjusted for inflation and population growth, rose three times faster than similar provincial government spending over the period from 2000 to 2010. The primary reason was a rapid run-up in labour compensation costs and significant increases in the number of employees on municipal payrolls across much of the Metro Vancouver region. Apart from struggling to manage labour costs, most local governments in BC have also been slow to consider the use of outsourcing, alternative service delivery, and public-private-partnership models as ways to provide services and develop infrastructure in a more efficient and cost-effective manner. One reason for many municipalities’ reluctance to innovate in service delivery and infrastructure procurement is determined opposition from public sector unions. If local governments want to engage with the business community on a dialogue around revenue sources and other aspects of municipal public finance, they need to acknowledge that many municipalities in BC have a spending problem. Unforutunately, the UBCM's "Strong Futures" paper dodges this important issue.